On August 15 last year, Kashya Hildebrand, the wife of Switzerland's most
senior central banker, should have been toasting the success of her
eponymous Zurich art gallery's latest exhibition.

Bonsai Couture, an elaborate mingling of Japan (EUREX: FMJP.EX - news) 's miniature tree tradition with
the fabrics and accessories of high fashion, was closing at the end of the
week after a two-month run to make way for Lebanese artist Marwan Sahmarani.
But instead, the former hedge fund manager was fretting about the value of
the dollar.

Her decision that day to transfer Sfr400,000 (£270,000) of the family's money
into US dollars would trigger the biggest scandal of her celebrated
husband's gilded career, throw the country's controversial banking secrecy
laws into the spotlight and expose an ugly political battle in the wealthy
Alpine country.

The dollar trade would make the Hildebrands a Sfr75,000 profit in just two
months a 19pc return but cost her husband, Philipp, the chairman of the
Swiss National Bank (SNB (Swiss: SNBN.SW - news) ), far more in terms of reputational damage and,
possibly, his job.

Despite repeated denials and being exonerated by two investigations, the
currency deal has left the whiff of insider trading hanging in the air. The
dollar's massive rise, which delivered the gain, can be traced to a single
action the decision by Mr Hildebrand and the board of the SNB to set a
ceiling for the Swiss franc, effectively pegging it against the euro, just
three weeks after his wife placed her currency bet.

Central bankers are supposed to be above reproach because so many of those
they regulate are not. Trust is their principle currency. In that respect,
the scandal has weakened Mr Hildebrand, who is so widely admired that last
year he was made deputy chairman of the global banking regulator, the
Financial Stability Board.

Responding to the allegations on Thursday, he acknowledged as much, accepting
his "mistake" and saying the trade "could bring my integrity
into doubt" albeit insisting that he "always acted in line
with the rules" and can still "look myself in the mirror".

Others were less forgiving. "I think Hildebrand has lost credibility over
this issue and he will have to go, if not now then further down the line,"
Michael Hewson, an analyst at CMC Markets, said.

For one senior Swiss figure, Mr Hildebrand's departure would be a moment to
savour. Christoph Blocher, a billionaire industrialist and firebrand
ultra-nationalist politician, sparked the scandal by alerting the Swiss
President, Micheline Calmy-Rey, to the trade in December last year.

Mr Blocher has been a fierce critic of Mr Hildebrand for the best part of two
years and the leak of such sensitive private information to his Swiss
People's Party (SVP) was a golden opportunity. Operating through official
channels as well as Die Weltwoche , a right-wing weekly magazine with
strong SVP sympathies, Mr Blocher ensured Mr Hildebrand was subjected to
intense scrutiny.

On Friday, the SVP wasted no time in making its position clear. "It is
unlawful and completely untenable that leaders of the SNB carry out currency
actions in their private affairs. Philipp Hildebrand is no longer acceptable
as chairman," it said.

But, in his dogged pursuit, Mr Blocher has himself committed one of
Switzerland's cardinal sins. By accepting stolen account details, he
willingly compromised the nation's precious banking secrecy laws at exactly
the point they are under greatest strain.

Not one to miss an opening, Mr Hildebrand rounded on Mr Blocher, saying: "I
regret that some circles, who regarded themselves as vehement champions of
Switzerland's bank secrecy, now have no qualms about serious violations of
that to pursue their political aims. They are damaging the interests of
Switzerland."

In spite of efforts to paint himself as the victim of a smear campaign, Mr
Hildebrand still has questions to answer.

His wife placed the trade 12 days after the SNB first intervened in the
markets to support the Swiss franc, by cutting interest rates by half a
percentage point and flooding the markets with the currency. A week later,
on August 10, the SNB reinforced its liquidity actions, and two days after
the trade on August 17 "intensified" its policies
again, warning it would "take further measures".

On September 6, it did just that revisiting a policy unused since the 1970s
by effectively pegging the currency to the euro at €1.20 (99p). In the 15
minutes following the announcement, the "Swissie" fell a record
9pc. The Hildebrands closed their position the following month, having made
the kind of return that even the New York (Frankfurt: A0DKRK - news) hedge fund Moore Capital, where
they worked and met, would have marvelled.

The nub of the problem is that the trade was effectively a play on central
bank policy, making even Mr Hildebrand's "pillow talk" potentially
incriminating.

At the time, the Swiss franc was soaring as investors sought safe havens to
store their money. With the euro crisis escalating and the US at risk of
default as politicians struggled to agree a new debt ceiling, gold was
spiking, UK and German government bonds were in heavy demand, and the
Swissie a traditional store of wealth was experiencing vast levels of
interest.

In the five months to August, the Swiss franc appreciated almost 20pc
severely endangering Switzerland's economy. Even Mr Blocher, who originally
launched his attacks against Mr Hildebrand over interventions in 2009 and
2010 to depress the currency that cost the SNB Swf38bn, started calling for
stronger action to protect the country's exporters.

"At the time, it was reasonable to suppose there would be a more robust
response from the SNB against the euro," said Simon Derrick, head of
currency strategy at BNY Mellon.

As many investors were taking positions that "shorted" the Swiss
franc, according to currency experts, it was not surprising that Mrs
Hildebrand, reprising her days an economist at Moore Capital, spotted an
opportunity. "What motivated me to buy dollars was the fact that it was
at a record low and was almost ridiculously cheap," she told Swiss
television.

The question is whether she should have acted on her hunch at all, considering
her husband's position. Given that "safe havens were in short supply",
as Mr Derrick put it, there was little immediate prospect of the Swiss franc
depreciating without central bank intervention.

According to two probes into the Hildebrands' actions by the Swiss government
and SNB auditors PricewaterhouseCoopers (PwC), no rules were broken. Mrs
Hildebrand did not tell her husband what she had done until the following
day, when he informed the SNB board. Countering claims in Die Weltwoche
that Mr Hildebrand placed the trades himself, he said: "It's very clear
this transaction was ordered by my wife and there's an email to prove it."

However, it was only by keeping the trade alive while setting policy that the
profit was made. Addressing that clear conflict, he said: "I only blame
myself that I didn't reverse the transaction." In an attempt to draw a
line under the affair, he donated the money to a mountain rescue charity and
attempted to deflect some of the blame to his wife's independence.

"We married relatively late, and from the beginning our marriage has
always been, how shall I put it? Well, let's say my wife is a strong
personality," he said. His defenders point to the relatively small
amount that was made as evidence that nothing nefarious took place. Mr
Hildebrand, after all, earns Swf862,000. But even they accept that, at best,
the couple were guilty of startling naivety.

Seen from another perspective, though, the scandal goes to the heart of
perhaps the greatest Swiss controversy of all banking secrecy. The story
emerged because a 39-year-old bank IT employee allegedly took three screen
shots of the Hildebrands' account and leaked the information.

He passed it to Herman Lei, a lawyer associated with SVP, who then gave it to
Mr Blocher. In allegedly doing so, the employee of Bank Sarasin in Zurich
broke laws that date back to 1934. He has been sacked, arrested and faces up
to three years in jail. By using the information, though, Mr Blocher has
aligned himself with the very people he considers to be the enemies of
Switzerland.

Banking secrecy is the foundation on which Switzerland's $2 trillion (£1.3
trillion) wealth management industry has been built. But international
pressure, US persistence and whistleblowers like the Bank Sarasin worker
have done more to dismantle it in the past three years than anything over
the preceding century.

Even the $1.25bn settlement in 1998 between Swiss banks and Holocaust victims
over $425m of looted Nazi gold the country bought from Germany in the Second
World War did little to change the country's famous tradition of anonymous,
numbered accounts.

Last Thursday, on the same day the SNB published its PwC probe, warrants were
issued in the US for three Swiss bankers in the latest front in the global
war against tax evasion. They were charged with allegedly helping wealthy
Americans hide more than $1.2bn in secret accounts. They were not the first.
Other Swiss bankers were arrested and jailed both last year and in 2010.

President Barack Obama has sent a clear message since taking office that
banking secrecy will not be tolerated as long as it facilitates tax evasion.
US action has been swift. In 2009, Washington launched an unprecedented case
against UBS (NYSEArca: DJCI - news) for conspiring to defraud it of billions of dollars in taxes by
helping tax evaders.

Weakened by massive sub-prime losses in the financial crisis, UBS did not have
the financial muscle to put up a fight. The Swiss government, conscious of
the pivotal role UBS has in the Swiss economy, eventually caved in as well.
In a landmark deal in 2010, Switzerland turned over the names of 4,000 US
account holders and paid a $780m fine. "Swiss bankers were horrified,"
said Andrew Watt, a specialist tax investigation consultant.

The US wasn't finished. In September last year, it threatened similar action
against Credit Suisse (NYSEArca: CSMA - news) and nine smaller Swiss private banks. In the meantime,
it established the Foreign Account Tax Compliance Act, which requires
overseas banks to disclose the financial details of their US customers
annually or pay a 30pc tax on profits from transactions of US securities. As
a result, Swiss banks are opting out of private banking business in the US.

The US may have been at the forefront of the crackdown, but others have
followed its lead. With political pressure mounting, the UK and Germany have
both struck deals with the Swiss government to recover the proceeds of tax
evasion.

The UK expects to receive £5bn between 2013 and 2015 under an agreement that
will see the Swiss impose a one-off levy of up to 34pc on the estimated
£125bn of UK funds held in Switzerland. The contents of the accounts would
then be subject to annual withholding tax of up to 48pc on earned income.

For Switzerland, which will collect and hand over the tax, the crucial element
of the deal was that banking secrecy will be preserved.

But with Western governments desperate to raise revenue to reduce their vast
budget deficits, there is finally the unity of political will to crack down
on the elite who use Switzerland to shelter their wealth.

"There has been a massive international attack on banking secrecy,"
Mr Watt said. "Momentum has gathered, and they've kept it going."

The scandal may yet claim Mr Hildebrand's scalp, but a victory for Mr Blocher
would be pyrrhic if it proved to be another chip in the foundations of
Switzerland's once-mighty principle of banking secrecy.

=
The secret Swiss
=

Tax evasion

US allegations that Switzerland's biggest bank, UBS, was aiding 17,000
American clients to evade tax on $20bn (£12.9bn) of assets led the Swiss
giant to pay $780m in 2009 to settle criminal charges. It admitted it
fostered tax evasion, agreed to disclose 4,450 client names and ended its US
cross-border banking business. Last year Credit Suisse Group (NYSE: CS - news) , Switzerland's
second biggest bank, gave client account data to the Swiss tax authorities
under a second US investigation. Last July, seven Credit Suisse bankers were
indicted on a charge of conspiring to help US clients evade taxes through
secret accounts.

Data leaks

In 2010, HSBC (LSE: HSBA.L - news) 's Swiss private bank lost details of 15,000 clients in a data
theft. Accounts of about 3,000 British residents were passed to HM Revenue &
Customs. The leak was one of a spate of data thefts that rocked private
banking.

Levy deal

George Osborne announced an information-sharing deal with the Swiss last year
that could raise £5bn by 2015. Under the deal, UK accounts held in
Switzerland in May 2013 will be subject to a one-off levy that could be
worth 34pc of the contents.

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